IMF to FG: Phase out fuel, electricity subsidies completely — they’re costly

The International Monetary Fund (IMF) has asked the federal government to completely phase out petrol and electricity subsidies in the country.

The IMF made the recommendation while advising Nigeria on pathways to restoring macroeconomic stability in its ‘Post Financing Assessment (PFA)’ report.

Nigeria’s liquidity-challenged power sector is currently not allowed to charge a cost-reflective tariff due to a subsidy paid on electricity by the government.

The country’s government had spent N204.59 billion on electricity subsidy in the third quarter (Q3) of 2023, and plans to expend an additional N1.6 trillion in 2024 to enable citizens access power at a low cost.

On the other hand, the petrol subsidy removal, which came into effect on May 29, 2023, has worsened the living conditions of the populace, as the disposable income of Nigerians continues on a downward spiral due to inflation.

Although there are debates on the full implementation of petrol subsidy, with the World Bank hinting that the federal government has partially reintroduced under-recovery, the cost of living in Nigeria has remained up.

Speaking on recent remedial efforts in its report, the IMF said the government has released cereals from the grain reserve, provided subsidised fertilizer to farmers, and capped retail fuel and electricity prices — “thus partially reversing the fuel subsidy removal”.

The lender said the government also implemented a civil service wage award, and suspended the value-added tax (VAT) on diesel to ease the impact of the rapidly rising inflation on living conditions.

The institution, however, called for a total removal of petrol and electricity subsidies, saying they are expensive and often do not reach the most vulnerable groups.

‘FUEL, ELECTRICITY SUBSIDIES ARE COSTLY’

“The new administration has made a strong start, tackling deep-rooted structural issues in challenging circumstances,” the IMF said.

“Immediately, it adopted two policy reforms that its predecessors had shied away from: fuel subsidy removal and the unification of the official exchange rates. Since then, the new CBN team has made price stability its core mandate and demonstrated this resolve by dropping its previous role in development finance.

“On the fiscal side, the authorities are developing an ambitious domestic revenue mobilization agenda. Like many other countries, Nigeria faces a difficult external environment and wide-ranging domestic challenges.

“External financing (market and official) is scarce, and global food prices have surged, reflecting the repercussions of conflict and geo-economic fragmentation. Per-capita growth in Nigeria has stalled, poverty, and food insecurity are high, exacerbating the cost-of-living crisis.

“Low reserves and very limited fiscal space constrain the authorities’ option space. Against this backdrop, the authorities’ focus on restoring macroeconomic stability and creating conditions for sustained, high and inclusive growth is appropriate.

“The CBN has set out on a welcome path of monetary tightening. The Governor has committed to making price stability the core objective of monetary policy, and the CBN has taken actions to mop up excess liquidity. Continuing to raise the monetary policy rate until it is positive in real terms would be an important signal of the direction of monetary policy.

“The government’s focus on revenue mobilization and digitalization would improve public service delivery and safeguard fiscal sustainability. The envisaged reduction in the overall deficit in 2024 would help contain debt vulnerabilities and eliminate the need for CBN financing.”

The institution said temporary and targeted support to the most vulnerable in the form of social transfers is needed, given the ongoing cost-of-living crisis.

The IMF noted that fuel and electricity subsidies are costly, do not reach those that most need government support “and should be phased out completely”.